A healthy financial plan is more than being debt-free or having an emergency fund or a paid-off house. A healthy financial plan consists of two parts: a good offense and a good defense. The offense portion is eliminating your debt, saving an emergency fund, saving for retirement and college, and paying off your mortgage. The defense portion is what you need to reduce your risk, so when you have wealth you don’t just turn around and lose it.
Offense Wins Games
Most people watching a football game want to see their team score 50 points because that’s exciting. Every time a touchdown is scored or a field goal is made, you feel good about your team. The higher score potential in football is probably why I would rather watch a football game over a baseball game. It’s probably why I would rather watch a bowling game than a soccer game. We love it when our offense is on the field and scoring.
When you see your debt is being reduced by a couple thousand dollars a month, or you see your emergency fund increasing on its way to $20,000, you get excited. When your debt is paid off you want to run outside and scream, “I’m debt-free!” It’s exciting to see your wealth increase month-over-month. Eventually, it’s increasing $50,000 or $100,000 a year without you doing anything. That’s exciting! All those things are a winning offense.
Defense Wins Championships
Defense can be boring. Sure, there are a few times each season where there’s an interception that’s run back for a touchdown, but as mentioned before, most people want to see their offense on the field scoring points. Imagine a team hiring a local high school’s defensive team for a few thousand dollars so they can spend all their available money on the best offensive players in the league. That team’s offense will score a lot of points! However, the other team’s average offense would score on every possession. The team with the awesome offense will lose the game because of their bad defense. This is what it’s like when you have no defensive plan for your financial life. Don’t go through your life trying to amass a large amount of wealth and not have a defensive game plan in place.
Let’s Go Defense
Your defensive plan mainly consists of insurances, but it also consists of teaching your children about money and having a will or estate plan.
Will or Estate Plan
Most of you need a simple will. Your will needs to consist of two things: what you want to be done with your assets, and who will take care of your children. I don’t care what happens to your assets when compared to what I care happens to your children. In most states, if you do not have a will, the government will distribute your wealth how you were going to have it distributed anyways. The government most likely will not put your children where you want them to go. Although they would most likely go to one of your siblings or another close relative, it might not be the one you want. For no other reason, get a will because you care for your children’s spiritual well-being. After that, get a will so you decide how to distribute your assets and not have the government decide for you.
There are some free resources online where you can create a will, and it costs you nothing except a few minutes of your time. If you want, you can hire a lawyer to do this for you. Check your state laws regarding setting up a will.
Some of you need more than a simple will. You need a plan for your whole estate. You need to get with a lawyer and have this taken care of.
What can be more boring than reading about insurance? A soccer game perhaps? Or a baseball game when the coach keeps going to talk to the pitcher? I’m sure he’s not out there talking about saving 15% on his car insurance, but I digress…
Insurances are the core of your defensive plan. Insurance does not make you wealthy. It protects your wealth, so you don’t lose it. There is no point in becoming wealthy and then making one mistake where you can lose all your wealth. Insurance is used to transfer risk. When a bunch of people buy insurance, all of them are transferring risk to one another. When one person has a loss, the premiums that everyone paid in help pay for that loss.
Premium, Deductible, and Coverage
At a high level, insurance policies have a premium, a deductible, and coverage amount. The premium is the cost you pay each month or year to have the insurance. A deductible is how much you need to pay before your insurance covers the rest of your loss. Coverage is how much insurance you bought, or how much risk you want to transfer.
In most cases, the higher your deductible, the less your premium will be. When you have a fully funded emergency fund in place, you can increase your deductible because you have available money to pay more out-of-pocket. In most cases, this saves you money in the long run.
You want to buy insurance to cover the big costs. There is no need to have insurance on something that you can pay for out of your pocket. You don’t need to insure your $300 TV or your $100 vacuum cleaner. When they break you use your emergency fund to buy another one. You need to insure your house because it’s an asset you cannot afford to lose. You need life insurance because others depend on you. Once no one is depending on you to take care of them financially, you no longer need life insurance. This means, once you are financially independent, you can consider dropping your life insurance. Until then, you need to carry enough life insurance in order to protect your family.
In order to have a good defensive game plan, you need life insurance, home/renter’s insurance, auto insurance, health insurance, and disability insurance. Almost everyone needs those. If you are age 60 or older, you need to consider long-term care insurance. These are the big insurances that you need unless you can self-insure for them.
Have an awesome offense by getting out of debt, saving your emergency fund, and building wealth. Have a solid defense by having the right insurances in place to protect you, your family, and your assets. Teach your children about money while you are still here, and you need a will or estate plan in place to continue protecting your children after you are gone. Do these things to have a healthy financial plan.